Alan's Alert 6-16-2021

 

I have a running joke with a contractor friend of mine about the ridiculousness of the lumber industry.  We’ve traded memes back and forth.  Some of the best ones were; the most expensive place to take a girl on a date is the lumber section in Home Depot and that toothpicks could be sold as lumber seeds.  While lumber futures (ticker /LBS) have come down from their highs, they are still well elevated from what many would call normal.  We’ve seen similar reactions in futures markets for Corn (/ZC), Lean Hogs (/HE), Copper (/HG), and soybeans (/ZS).  While the lumber industry has its own unique quirks, it’s a bit of a shock to see the same scenario play out in unrelated markets.  Could oil and gas be the next markets to experience a similar run?

 

This morning the EIA (Energy Information Administration) released their gas and crude oil stocks report.

The report on crude oil inventories showed that it dropped by 7.355 million barrels during the June 11^th week.  This represents a fourth consecutive period of decline.

The gasoline report showed an increase of 1.954 million barrels.  This was opposite of market expectations of a drop but you can see from the chart of gasoline inventories that we are swiftly moving back to depleting inventories.  This comes as the summer driving season is beginning, as well as air travel increasing.  Here’s a summary report for TSA screened passengers on average by month:

We are well off the shutdown lows and as you can see below, oil futures (ticker /cl) have rebounded completely.

Now I’ve been holding Continental Resources (CLR) since 4/13/20.  I also have options on USO that were purchased 2/8/21 & 4/29/21.  I’m confident that this story isn’t over.  The Fed has pushed too much money into the hands of consumers for us to only be back where we began.  This money has made its way into the retail and real estate sectors of the economy.  We are seeing record prices for used vehicles.  I hear ads on the radio now about turning in your old RV because RV sales have gone through the roof.  I believe we will continue to see crude climb and I plan to be ready to add to my holdings when down days come.  I love buying on red days and selling on green ones.

 

As a reminder, the Federal Open Market Committee (FOMC) concludes their meeting today after which, they’ll release some economic projections, their interest rate decision and hold a press conference.  They hold eight of these meetings a year.  Only four of these meetings are associated with economic projections.  The market typically gets pretty excited about such matters but there is rarely anything groundbreaking that will be revealed.  The Fed doesn’t like to surprise the market, so they’ll announce well ahead of time what course they plan on plotting.  I’ll cover any details in tomorrow’s alert, in the meantime, here’s a sneak-peek into what the meetings look like.

Alan's Alert 6-2-2021

 

 By Alan Baerlocher

OIL!

 Black gold has broken through the final resistance of the past year which was $67.98 on 3/8.  Americans came out in force on Memorial Day to remember that people have died for their freedom to travel, camp, and BBQ.  TSA reported a traveler throughput of 1.9M on 5/31.  This is still below pre-pandemic levels of 2.5M but far exceeds the 350k in 2020.

 Looking at a longer dated chart of oil futures, the $65-$70/barrel price was a sticky point from July-September in 2018.  Oil eventually peaked at $76.90 in October of 2018 before the shale revolution ran the price back into the $50-$60 range.

 

Putting a cap on yesterday’s oil run was OPEC.  They announced a production increase in July.  OPEC is aware of US shale producers and have butted heads with them before.  They want oil prices to rise but they don’t want to push the price to a height that would cause shale producers to come out of hibernation and kick production into overdrive.

 

Another factor in the oil picture is Iran, and that country’s potential return to the international market.  In 2018, Iran was producing up to 5M barrels per day.  Their current output in somewhere around 3.5M bbd.  Stacking up against OPEC+, they would be the 5^th largest producer behind Saudi Arabia, Russia, Iraq, and the UAE.

You can see from the chart above that inventories are quickly dropping to their pre-pandemic average.  Even with the potential production from Iran and US shale, I foresee an oil price that continues to climb the “wall of worry”.  I wouldn’t rule out $80+ by the end of summer.  If inflation really gets hot, it could climb to triple digits.  To me; USO, BNO, Crude Futures, & producers still have room to run.  I still like Continental (CLR), Marathon (MRO), and Cabot (COG).  If you are high risk, Diamondback Energy (FANG) has a high debt load and a high weighted average cost of capital, but a great operating margin. Things could really turn in their favor with high inflation (reducing the debt) and a high oil price.

 

 

ISM Manufacturing

 

I want to touch on the data coming out of the ISM.  Manufacturing PMI came in at 61.2%.  Anything above 50% indicates expansion.  New orders, production, & employment were all growing.  Deliveries are slow and backlogs are growing.  The bottlenecks are still in the economy with workers incentivized to stay on the couch.  Many respondents to the ISM survey conveyed a similar response.

·         “…struggling to find employees..”

·         “…finding workers at the factory and warehouse level is not only impacting our production, but suppliers’ as well..”

·         “…lack of qualified candidates to fill both open office and shop positions..”

·         “labor shortages impacting internal and supplier production.”

 

It’s obvious that this problem won’t solve itself until one of two things happen.  1) Unemployment benefits are cut or 2) Wages raise to a level that entices workers to find work.  All commodities were up in price except acetone.  Thirty-two commodities were in short supply including;

·         aluminum

·         corrugated boxes

·         electrical & electronic components

·         lumber

·         MDF

·         plastic products

·         PVC

·         circuit boards

·         semiconductors

·         steel & steel products

·         and wood pallets.

 

ISM services survey comes out tomorrow.  I am guessing it will be a lot of the same.  The ADP employment report also comes out tomorrow.  It will be interesting to see what it holds in store for us.

 

 Construction Spending

Lastly, the total construction spending report was posted yesterday.  We continue to see spending on construction increasing.  Spending was up 9.8% Y/Y and .2% M/M.  We are well into the boom phase of the business cycle.  Both labor and raw materials are still tight, yet spending continues to creep up.